magicJack VocalTec (CALL) – Merger Arbitrage – 5% upside

Current Price – $8.3

Buyout Price –  $8.71

Upside – 5%

Expiration Date – H1 2018

Merger announcement

This opportunity was suggested by Jesse.

 

B. Riley is acquiring CALL for $8.71 in cash and current spread stands at 5%. This merger agreement culminates almost 1.5 year long saga of CALL negotiating with interested parties as well as launching strategic alternatives process. Initially somewhat higher bids for the company have been quoted (e.g. $9.5 from YipTV) and activist shareholders cited potential valuation as high as $27/share a year ago. Clearly none of the higher bids materialized. A good overview of the proxy fights and events leading to current situation can be found here.

MajicJack operates in VoiP industry and its business has been on a gradual decline over the recent years – Q3 revenues are down 12%, operating cashflow turned to zero, monthly churn is at 2% and new user activation are dropping. The business is likely to be in a terminal decline although management has recently somewhat stabilized the operations. Due to its strong (even-tough declining) cashflow generation CALL was value investor’s darling back in 2014 and there is plenty of coverage for anyone interested in further background.

Main risks for the merger:

  • Riley walking out from the deal due to continued CALL business deterioration. We are likely to see couple more quarters of earnings before this merger closes and if business starts declining faster than expected Riley might decide its better to pay termination fee (amount undisclosed) than proceed with the merger.
  • Merger is conditioned on CALL shareholder approval - do not see this a a big risk as shareholders are likely already tired of 1.5-year-long sale process. Also so far (more than a month after announcement) there have not been any objections from any of the institutional holders.
  • Regulatory approvals from both US and Israel anti-trust authorities – keeping in mind small size of the transaction ($140m) and overall declining industry, regulatory approvals should be easy to obtain.
  • Financing – merger is not conditioned on financing and as of Q3 Riley had $102m in cash and raised further $70 in recent bond offering. So the company should have sufficient funds for the acquisition of $143m
  • If merger fails, pre-announcement share price was $5.5 – 33% lower compared to current levels.

 

 

8 COMMENTS

  1. Jesse Warlick

    RILY is a company I’ve been following very closely and is one my larger positions. I’m working on a deck to document my investment process / findings for my own purposes, so I’m happy to share that once I’ve finished. RILY has been really acquisitive over the last year on some really interesting deals and I think once all the sausage is made the combined entity will be really attractive.

    I agree with everything above. Only other thing I’ll note is RILY previously purchased United Online, which is a dial-up internet business with similar revenue characteristics. RILY has done a really good job of executing there and has really improved cash flow despite declining revenue. I think that’s what gave them the confidence in this transaction.

    1. dt

      Agree on United Online point.

      For United Online the operating income as % of revenue has increased from 5% (2016 when United was independent) to 35% (9M 2017 under RILY). There are likely to be some incremental corporate overheads not accounted in the 2017 figure, but still the improvement is material.

      Since acquisition United Online segment already generated $43m in operating income (before Corporate overheads) compared to $45m paid for the company ($169m acquisition price less $125m in cash). So depending on the amount of incremental corporate overhead this investment seems to be paying off quite well.

      This makes RILY a very well informed buyer with already tested playbook and somewhat reduces the risk of them walking away from the transaction.

  2. greg lia

    Wondering if anyone is invested in this deal. Still a couple of percent gain left by my read. Details on timing and approvals appreciated if anyone has them, can’t find much online.

    1. dt

      According to 10Q only FCC approval is currently pending:

      “On March 19, 2018, the shareholders voted to approve the Transaction. Furthermore, the Company has received all required consents and approvals from the state public service commissions and is still waiting for approval from the Federal Communications Commission.”

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